According to the Hong Kong government, the territory is in recession as the ongoing protests degrade the economy beyond the economic fundamentals and further economic declines are forecast.
Despite the dire economic figures, a possible real estate bubble and further economic deterioration with possible Chinese legislative and/or military intervention may create enormous future buying opportunities.
Firms that are established in Hong Kong and are considering decamping will lose the hard-won business relationships with Hong Kong and China.
Remaining in place may result in short-term losses but long-term benefits signaling that the investor “toughed it out” in uncertain times.
The “Niagara Falls” trajectory of the Hong Kong economy presents unique investment opportunities for those bold and iron-willed investors willing to tolerate extreme short-term volatility for potential strong long-term rewards. In this article, I provide an overview of the status of important sectors of the Hong Kong economy and then identify the firms that offer potential opportunities in the property sector.
According to a South China Morning Post article dated September 28, 2019 “Hong Kong is the Most Overvalued Housing Market is at Greatest Risk of Bubble,” Hong Kong is not only the world’s most overvalued real estate market, it’s the most expensive amongst 25 global cities and is at greatest risk of a bubble, according to UBS Global Wealth Management, which states that it poses an “elevated risk of a price correction.”
Within this article, UBS provided a chart by Midland Realty showing average home prices per square foot in March 2011 of HK$13,259 (US$1,657) that rose dramatically to HK$22,523 (US$2,815) in July 2019.
According to a Financial Times article dated October 23, 2019, “Hong Kong Reforms Risk Overheating High-Priced Market,” Hong Kong chief executive Carrie Lam has attempted to cool the market with the following policies:
- First-time buyers can borrow up to 90% of the value of a property - which is essentially a down payment of a mere 10%. Hong Kong’s median home price is 21 times the median household income.
- Government seizure of land from private landlords for the purposes of constructing public housing under the Land Resumption ordinance to boost the housing supply.
These attempts have been unsuccessful because of the continued demand by the influx of middle-class and wealthy mainlanders renting or purchasing commercial and residential property, which keeps prices elevated.
According to a Financial Times article dated October 7, 2019, “Hong Kong’s Office Market Suffers Worst Month Since 1996,” the commercial property sector is imploding, with the shares of major property developers such as Sun Hung Kai Properties (OTCPK:SUHJY, -14%), Henderson Land Development Company (OTCPK:HLDCY, -12.4%) and Li Ka-shing’s CK Hutchison Holdings (OTCPK:CKHUY, -11.4%) plunging. In September, only 27 transactions were made in the office market.
Hong Kong’s normally prosperous banking sector is running into a whipsaw of difficulties, resulting in lower valuations, according to an article in The Wall Street Journal dated October 27, 2019, “Hong Kong Banks, Long Fat and Happy, Confront Leaner Times.” To paraphrase the reasons:
- The weakening economy is resulting in more loans going bad and less credit demand from households and business.
- Lending is less profitable because Hong Kong’s currency is pegged to the US dollar and, for this reason, must match interest rate cuts by the US Federal Reserve.
- The forthcoming virtual competition in which the Hong Kong government granted licenses to online banks which won’t require brick-and-mortar branches.
Retail & Tourism
According to Statista, a German online portal providing data on the global digital economy, industrial sectors, consumer markets, public opinion, media, demography and macroeconomic trends, Hong Kong tourism (consistently boasting the most tourists in the world) has dropped precipitously in 2019. The number of tourists in Hong Kong, which was 6.8 million in January, fell to a mere 3.6 million in August.
A Wall Street Journal article dated October 31, 2019, “Hong Kong Protests Force City Into Recession, ‘With No Recovery in Sight’” noted Hong Kong’s economy shrank 3.2% in the July-September quarter from last year. The article provides the following disturbing economic trends with respect to August-on-August figures:
- Tourism, particularly from mainland China, fell as hotel occupancy fell 66% vs. 90% last year.
- Retail sales fell 23% from last year, the worst drop ever.
- Department store sales fell 30%.
- Specifically sales of jewelry, watches, etc. fell 47%.
The Political Set-Up And Aftermath
It appears that chief executive Lam is the political sacrificial lamb to be blamed for the continuing intensity of the protests and inability to re-establish law and order since the protests began in June.
For this reason, according to recent Financial Times articles, China’s President Xi is seeking a new chief executive to be installed by March 2020. I believe that whoever President Xi selects will be more politically “malleable” to Beijing’s requests. The Hong Kong government has progressively applied increasingly tighter legal restrictions by denying protestor rights to demonstrate, removal of face masks, etc., but to no avail.
Meanwhile, China is cleverly piggybacking and putting forth a step-by-step game plan as seen by President Xi’s recent speech that strongly alluded to implementing draconian, yet legal, measures. The following reasons indicate why China is highly reluctant to intervene militarily:
- The appointment of a new Hong Kong chief executive in March 2020 during China’s parliamentary sessions. This means that the China is giving the Hong Kong government 5 months to pacify the protestors.
- As a last resort, should the demonstrations continue, China may convince the Hong Kong government to “request” for Chinese intervention under the Basic Law Article 18, which allows China’s national security laws during a state of emergency for the purposes that it appears that China did not act unilaterally and without exhausting all non-military means.
- Nonetheless, China’s reluctance to militarily intervene is the combination of its operational and logistical difficulty and the risk that if such an operation fails or “goes sideways,” the result would then threaten President Xi himself within the China leadership. As ex-Australian Prime Minister Kevin Rudd articulated at a talk at EY, NY, “Hong Kong - Where to Next?” once China enters Hong Kong, they own it.
Chinese intervention may be only legislative - by implementing a fast-track managed transition with a tightly controlled and monitored system to integrate Hong Kong more closely into China - rather than the “shock and awe” of military intervention.
So, why should one seriously consider investing in Hong Kong? Because this is the best time to pre-position one’s resources, consider all options and determine beforehand whether to “bunker down” if already established in Hong Kong. There will be opportunities for established firms, large and small, to grab market share from those entities that decide to leave or maintain merely a small representative footprint.
Because of the powerful and ever-shifting underlying political and economic dynamics, it’s extraordinarily difficult to determine how this high-stakes, intense crisis will play out. This means that the mindset for an investor is flexibility, adaptability and an extreme tolerance for short-term high volatility for the purposes of long-term prosperity.
Real estate prices will fall much lower as many foreign firms reduce their presence and decamp elsewhere in Asia, notably Singapore. Additionally, the continuing global slowdown and perhaps global recession will put further downward pressure on prices.
I believe that Hong Kong will retain its commercial importance but in a diminished role. The core professionals and administrators have no choice to remain, but their experience will ensure high operational efficiency, which will make Hong Kong surprisingly operationally cost-effective.
As a speaker during my presentation “Hong Kong Perspectives” at the Chinatown Rotary Club in NYC on October 22, 2019, I noted Asia will continue to be a critical area in global business, with China as the biggest player in the region.
Hong Kong will always be expensive; it’s a question of its relativity to other alternatives in the region. From a strategic investment perspective, because of Hong Kong’s limited land, I recommend investment opportunities in residential and commercial properties, particularly through the aforementioned property firms, but after the crisis has ended. Of course, that in itself is open to interpretation, but a reliable indicator would be the level of market confidence.
There will continue to be strong downward pressure on the overall economy, at least until a new chief executive is appointed in March 2020, at which point a reassessment for actual investment should be made.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.